F 2 Real Estate Lesson 2

“Seek not proud riches, but such as thou mayest get justly, use soberly, distribute cheerfully, and leave contentedly.” – Francis Bacon (Essays, 1625)

My first experience in real estate was an unforgettable disaster. KFF and I were living in a little town house in the Dupont Circle area of Washington, D.C. I had just come back from a two-year Peace Corps stint in Africa and was working as a journalist for a small international newsletter-publishing business on K Street.

With the expenses (some welcomed, some not) of an unplanned newborn, a long-ago-planned graduate-school education, and an expected but underestimated (after two years of living in a mud hut) modern American lifestyle, KFF and I were financially strained. Still, BDD, my landlady, convinced me that I should be a property owner. She sold me a condominium apartment in a building she had just developed. It didn’t cost me much up front, but the monthly bills were pretty stiff — maybe $1,000.

The condo turned out to be too small to live in, so we decided to rent it out. And that’s where my real-life education in real estate started.

Counting taxes, upkeep, and my mortgage, the apartment was costing me about $950 a month. When I put it on the rental market, I soon discovered it would fetch only $550. That left me cash negative $400 a month, or $5,000 a year. Since I couldn’t afford that, I put the apartment on the market — but discovered that the amount I still owed the bank (it might have been $68,000) exceeded the property’s actual market value by about $15,000.

Talk about being on the horns of a dilemma! My choice was to keep the condo and “lose” $400 a month, which I could barely afford to do — or sell it and lose $15,000 on the spot, which I couldn’t do.

So I couldn’t sell it. I had to cut back on our other expenses and hope the market would get better.

Three years later, out of pocket $15,000, the market was just the same. And my real-estate deal was about to get worse.

The loan was a three-year balloon. What that meant was that every three years I had to either pay it back in full (which I could not afford to do) or refinance it — which meant higher fees and closing costs. That first closing, if I remember correctly, my monthly out-of-pocket increased to $450, and for the privilege of paying that extra $50, I had to come up with $1,500 in closing costs!

Of course, I considered refinancing with another bank. But I soon discovered that my loan was backed by neither Freddie Mac nor Fannie Mae. Without government backing, no other bank would go near it. I was stuck with the crooks I had signed my first contract with. They wouldn’t give me anything but three-year balloons, because that’s how they could get the most money out of me. They were making a lot of money on property that wasn’t worth much, and every three years they got to jack up the payments and charge me for their time to do it.

If I told you that was the end of it, you’d surely pity me. But it was actually worse. My loan, you see, was negatively amortized. What that meant was that at the end of the three years, the amount I owed — if I wanted to buy out the mortgage in cash — was higher than it had been three years earlier. After I paid the bank more than $5,000 in mortgage payments and another $15,000 in closing costs, my $68,000 mortgage was now $72,000!

I was in real-estate hell. And it wasn’t until I decided to make money — and actually made some — that I could afford to pay off the crooks and get myself out of it. The whole lesson, in total, cost me $35,000 and six years of living $400 a month poorer than I should have.

Oh… one more thing. The sweet girl I rented to turned out to be a hooker and was bringing her trade up to the apartment day and night, which made the neighbors complain constantly. I couldn’t kick her out, I was advised, because the laws in D.C. were set up to protect innocent tenants from evil landlords.

So much for first impressions. Tomorrow, I’ll tell you how and why I got back into real estate and give you one specific way to make a lot of money from it.

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